When A Company Succeeds On All
When a company succeeds on all fronts, it likely has a clear sense of purpose. This aspect of a company is often disregarded, considering profits are what keep them on their feet. One could assume that companies frequently struggle because they lack a sense of purpose, producing subpar returns. To provide more insight on the topic, in an annual letter to CEO’s, BlackRock’s CEO Larry Fink states that without a sense of purpose, a company, private or public, is not achieving its true potential. This potential is embedded in a company’s strategy, which is more than just communicating a path to achieve financial performance. Fink claims that to sustain performance and enhance long-term value, companies must also understand the societal impact of their businesses. In a similar light, in an article discussing Fink’s letter, Patrick Horst sums up Fink’s insight perfectly; in an ideal setting, companies will, “deliver financial returns and make the world a better place.”
In its most literal form, the goal of financial management is to maximize the current value per share of a company’s existing stock (Ross). It is assumed that in order to achieve this maximization on the current value per share, financial managers are consistently seeking efforts in the shareholders’ best interests. In order to do so, the financial manager must make decisions that will increase the value of the stock. If a company is truly striving profit-wise, stockholders’ residual claim will be constantly increasing. Note that stockholders have residual claim on the firm’s income– the money left over after creditors, suppliers, employees and anyone else with rightful claims are paid is owed to the shareholders (Ross). Hence, a company whose financial managing efforts are succeeding bring current value not only to its stock, but to the creditors, suppliers, employees and others with legitimate claims who help the company operate. Most importantly, effective financial management plans ahead for the long term, whereas struggling firms likely think more short term.
There are striking similarities between this goal of financial management and Fink’s proposal. First off, these objectives are associated because both concern efforts to bring value to the firm. Both financial managers and Larry Fink agree that this value is not just meant to last for the short term. In fact, they’d likely agree that a firm honed in on its long-term growth strategy would be better off. A company concerned more about their quarterly marks is likely failing to meet the needs of shareholders (Fink). On that note, a company that’s successful in financial management is not only increasing the current value of its stock, but enabling a recurring theme where investors want to keep investing that enhances its long term value.
On the contrary, the goal of financial management and the overarching theme in these two articles differ because the textbook definition of financial management is to maximize the current stock value of a company. However, when value is the only focus, one is missing this sense of purpose that Fink and Horst discuss in their articles. More specifically, Fink worries that financial management ignores this sense of purpose that includes, but isn’t limited to, environmental impact, workforce diversity, community engagement and employee re-training.
On February 24, 2018 Delta Airlines announced that it’s cutting ties with the NRA through their Twitter account, stating, “Delta is reaching out to the NRA to let them know we will be ending their contract for discounted rates through our group travel program. We will be requesting that the NRA remove our information from their website” (Rizzo). In effect, Delta saw a 2.3% increase in its common stock value for the one day of trading since its announcement. On Friday, February 23rd, the stock closed at 53.46 and on February 26th, it closed at 54.69 (NASDAQ). It seems that the price change occurred because people invested their money into a company that now aligned with their values. Perhaps this increase was aided by an announcement on Delta’s news outlet that it they are forming a Seamless Air Alliance, which give airlines the power to supply passengers with in-cabin connectivity experience (Airbus).
Overall, Delta’s cut ties with the NRA exemplify how businesses need a sense of purpose in order to make a profit.